Saltwater to Freshwater: A Panacea That Travels Rough Seas

Art by Philip Lindeman

Humanity faces a plight today: Freshwater, vital for life, is a dwindling resource. So large efforts are underway to convert the brackish ocean into potable water, a process known as desalination, or desal.

This remedy could solve the problem, albeit at great expense and energy use, not to mention occasional political opposition. It also presents an investment opportunity.

“Water, water, every where,/ Nor any drop to drink.” Such was the lament of the sailor/narrator in Samuel Taylor Coleridge’s epic 1798 poem, “The Rime of the Ancient Mariner,” as the drinking water ran out on the mariner’s ship, which was trapped upon an endless, windless sea. Too bad the mariner did not have desal.

In desalination, salt is removed from water by passing the liquid through a filter or by boiling it and collecting the salt-free steam, which then condenses back into water.

Desal plants are mostly owned by municipalities or other government authorities, but private companies build and often operate them. They are springing up all over the world, notably in desert nations in the Middle East.

An example of the difficult waters desal must ply is Poseidon Water, a subsidiary of publicly traded Brookfield Infrastructure Partners. To serve the desiccated San Diego area, it opened the Carlsbad Desalination Plant in 2015, providing San Diego County with 50 million gallons of drinkable water (10% of its needs) from the Pacific Ocean. But the Carlsbad facility took a long time to open (almost 20 years passed between inception and the start of construction, which took another three years) and encountered many obstacles from community activists who term it an environmentally questionable boondoggle.

A similar desalination plant proposed by Poseidon, slated for 93 miles up the California coast in Huntington Beach, got voted down by a regulatory commission in 2022 after a two-decade effort. Opponents called the Huntington Beach plant’s $1.4 billion cost overly expensive and charged, among other things, that the project would be dangerous to marine life, with fish sucked into its intake valves.

Worth Its Salt?

The earth’s surface is 70% ocean and contains 97% of global water, all of it brackish. Much of the remaining freshwater (2%) is encased in icecaps and glaciers, and only 1% is available for drinking—from reservoirs, lakes, rivers, aquifers and the like.

As populations grow, that 1% soon will not be enough, the argument runs. Globally, 2 billion people, about one-quarter of the world’s population, lack safe drinking water, stated a United Nations report last year. Meanwhile, droughts are spreading, likely owing to climate change.

A lot of folks live close to the ocean, per a United Nations tally: 40% of the world’s population is located less than 100 kilometers from a coast, while 25% live within 25 kilometers. Furthermore, about 300 million people, 4% of global population, now rely on desalinated water.

While desal is commonly thought to be the costliest means of providing potable water, the differential between desal and “re-use” (treating wastewater) has tightened. According to Pictet Asset Management, the cost per cubic meter of desalinated water is 40 cents, versus 15 to 30 cents for re-use. A decade ago, the Pacific Institute research foundation put the cost for desal at $1.70.

Nick Holmes, a portfolio manager specializing in water at Duff & Phelps Investment Management, affirmed in a recent interview that desalination costs have come down over 10 years to one-third of what they had been, thanks to cheaper energy sources such as solar power and better filters.

That said, desal continues to be priciest because it uses much more power than any other water treatment. The desal plants “take up a lot of land,” and they need “giant air conditioners,” pointed out Timothy Kramer, the CEO of CNIC LLC, a platform for carbon-neutral investment products.

Regardless of its price tag, desal has one advantage over any other type of water treatment: There is a lot more seawater than human sewage or landlocked water supplies, such as lakes. “If you are in San Diego, where else [other than the ocean] are you going to get the water from?” asks Eric Homberger, vice president of strategic business partnerships at True Elements Inc., a water research group.

Money From Water

Desalination has created a burgeoning new business segment, one which has financial promise that may end up being attractive to investors, given growing freshwater needs.

The champ of the desal business is Energy Recovery Inc., which pioneered a seawater filtering system (the correct term of art is “reverse osmosis”) in the 1990s. Most of its business is desalination, although it also works in wastewater treatment and industrial fluids like refrigeration coolants.

“This company is the pure play” for desalination, says Cédric Lecamp, head of Pictet’s water strategy team. Energy Recovery’s patent on filtering, he adds, “gives them high returns.” In fact, the company had a towering gross margin of 69.6% for year-end 2022, the last reported. The stock has almost doubled over the past five years.

The other top players in desal are not pure plays, but their subsidiaries devoted to removing salt from water bring in one-tenth to one-fifth of overall revenue, strategists say.

Veolia Group is a French multinational that operates facilities providing energy and water treatment, with a growing business in desalination. It has built desalination plants in the United Arab Emirates, Kuwait and Kazakhstan, among other places. The stock, traded in Paris, has risen 55% over five years, not as good as the S&P 500, which has more than doubled, but respectable.

Tetra Tech Inc. is a consulting and engineering firm focused on energy (wind and solar) and environmental services, including desalination. The Pasadena, California-based company has seen its stock triple over the past five years, as revenue and earnings have vaulted. With a 40 P/E, the stock is not cheap. Tetra Tech was a key planner in such projects as the giant San Diego desal plant and a similar one for San Antonio that involves piping water from the Gulf of Mexico.

AECOM is a Dallas consulting firm with dealings in transportation (California’s high-speed rail line) and buildings (helped design one of John F. Kennedy International Airport’s terminals). Its water arm has designed desalination projects for Sydney, Singapore and California’s Salton Sea. AECOM (an acronym for architecture, engineering, construction, operations and management) also has enjoyed a tripling of its share price since 2019, along with solid financial results.

Desalination, says Duff & Phelps’ Holmes, “is fast growing because of the fast-growing scarcity of water.”

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